Reversing the Race to the Bottom

The increasing pace of globalization since the 1970s has in many ways done a world of good, writes

Dr. Barbara A. Ritter Dean, Wall College of Business, Coastal Carolina University.

Globalization has opened markets, increased competition, and allowed Less Developed Countries (LDCs) to benefit from improved business opportunity. However, there is also concern that the increased mobility for organizations has resulted in unintended consequences, leading to a race to the bottom.

The race to the bottom is aptly named as it describes the phenomenon by which LDCs compete for the global pool of capital made available by increasing organizational mobility. In other words, as countries compete to bring in the capital generated by large multinational corporations (MNCs), standards on things like worker wages, labor standards, working conditions, and environmental regulations are driven down in an attempt to compete in a global arena.

An example of the effects of the race to the bottom can be seen in the stagnant wages for most workers in the United States for the last several decades. According to the World Top Incomes Database, average income for the bottom 90% of US earners has actually decreased by $1,814 since 1970. There is also evidence that membership in the WTO is related to fewer rights such as the right to unionize, strike, and bargain collectively.1 Overall, worldwide scores on the labor-rights index have fallen dramatically throughout the 1980s and 1990s.

The Importance of Global Ethical Standards
The race to the bottom means that the increasing mobility of corporate investment has given MNCs extraordinary power to set their own bar on global ethical standards. In this regard, a focus on short term profits at any expense can take precedence because if increasing standards in one country will cut into organizational profits, the MNC can uproot operations and move on to a more ‘favorable’ environment.

The creation of accepted global ethical standards from reputable Non-Governmental Organizations and professional associations in a variety of industries will apply external pressure to slow the race to the bottom. In this regard, a set of universal ethical standards will guide corporations to the best ethical practices, providing clear and transparent guidelines about acceptable behavior. Commitment to such standards will also assure stakeholders and business partners a minimum standard of ethical behavior regardless of geographical location.

Reversing the Race to the Bottom
A substantial and growing proportion of the purchasing, investing, and voting population all over the world expects businesses to be good corporate citizens. In addition, the advent of social media has made it such that the public can become aware instantaneously of any transgressions, which may take millions of dollars off the value of a company in a few days or even a few hours. Thus, MNC’s need to protect their reputation for decent conduct as well as for financial good health.

Fortunately, the evidence is beginning to build that maintaining consistency in standards and policy worldwide benefits the corporation, and that consideration of ethical principles maximizes profit in the long term.

The adoption of global ethical standards across a variety of industries will not only benefit employees, consumers and other stakeholders, but it will also benefit MNCs.

1. Davies, R. B., & Vadlamannati, K. C. (2013). A race to the bottom in labor standards? An empirical investigation. Journal of Development Economics, 103, 1-14.
2. Dowell, G., Hart, S., & Yeung, B. (2000). Do corporate global environmental standards create or destroy market value? Management Science, 46(8), 1059-1074.
3. Ortiz‐de‐Mandojana, N., & Bansal, P. (2015). The long‐term benefits of organizational resilience through sustainable business practices. Strategic Management Journal.